Software-as-a-Service (SaaS) provider Zendesk’s (ZEN) investor Light Street Capital Management LLC has proposed a strategic alternative. The investor proposes that resuscitating the company as a standalone entity would be more beneficial for all stakeholders than having it become private. Light Street currently owns over 2% of Zendesk.
In June, Zendesk agreed to a $10.2 billion buyout by private equity firms Hellman & Friedman LLC and Permira. It was supposed to be the biggest private equity deal of the year.
What does Light Speed Capital Propose?
Earlier yesterday, there was news that Light Speed Capital was going to vote against the $10.2 billion buyout deal. Later in the day, Zendesk confirmed the receipt of an unsolicited non-binding recapitalization proposal from Light Street, giving details of the same in a shareholder letter.
As per the letter, Light Street suggested a $5 billion recapitalization plan. This included $2 billion in preferred equity, $2 billion in incremental debt facility, and the remaining $1 billion from the company’s balance sheet.
Light Street noted that this amount could be used for a tender offer for approximately 50% of ZEN stock at $82.50 per share. Following the deal, the preferred equity shareholders would control approximately 66% of Zendesk.
Furthermore, Light Street also seeks to refresh and expand Zendesk’s Board to ten members, including five independent directors. The firm also seeks to oust the current CEO, Mikkel Svane, who will continue to serve on the Board.
Light Street believes that a CEO who has a successful track record in the software business is required to steer the ship forward. Commenting on the same, the firm said, “The skills required to drive Zendesk to over $1 billion of revenue are different than the skills needed to drive Zendesk to $1 billion of operating profit over the next phase in its journey.”
Commenting on Light Street’s proposal, Zendesk notified shareholders that it would thoroughly review Light Street’s plan vis-à-vis the previously agreed upon buyout deal, and decide on a course, which is in the best interest of the company and its shareholders.
Meanwhile, Light Street founder Glen Kacher said, “With increased focus on driving meaningful operating margin expansion and fresh leadership, we believe that shareholders can realize private equity style returns in the public markets.”
In February too, Zendesk’s Board had rejected an unsolicited offer from private equity firms to buy the company. The previous all-cash deal was remarkably higher between $127 to $132 per share, compared to the current buyout deal pegged at $77.50 per share. The lower bid from the current deal with Hellman & Friedman LLC and Permira has also disappointed some shareholders.
Is Zendesk a Good Stock to Buy?
A lot is going on with Zendesk currently. Amid the chaos, Wall Street analysts prefer to wait on the sidelines until the dust settles. On TipRanks, ZEN stock has a Hold consensus rating based on 11 unanimous Holds. The average Zendesk price target of $77.94 implies 1.8% upside potential to current levels. Meanwhile, the stock has lost 26% so far this year.
Zendesk provides software products related to customer support, sales, and other customer communications. In its latest second quarter Fiscal 2022 results, Zendesk posted solid results, beating both revenue and earnings expectations.
Zendesk has been dodging multiple strategies, including buying the Survey Monkey business last year and being bought by private equity firms this year. There does not seem to be any clarity on the company’s future. It would be ideal to wait and see what the company decides about Light Street’s proposal or whether it goes ahead with the private equity buyout.